Lincoln Educational Services Corporation LINC – Cheaply priced but with regulatory risks

About the company

Lincoln Educational Services Corporation is a provider of career-oriented postsecondary education to high school graduates and working adults. The goal of this education is to provide them with the skills necessary to get entry-level jobs in their chosen fields.

The company achieves this through diploma and certificate programs, associate’s degree programs, and bachelor’s degree programs in the following areas of study: health sciences, automotive technology, skilled trades, hospitality services, and business and information technology. It has 43 campuses in 17 states and serves nearly 31,000 students. All of the campuses are either nationally or regionally accredited. The majority of schools operate through the Lincoln Technical Institute, Lincoln College of Technology and Lincoln College of New England brand names.

The company tries to differentiate itself from competitors by offering more frequent start dates, more flexible hours, more hands-on-training, shorter program lengths and greater assistance with job placement. Most people get education because they want to be able to get a job. It is such a simple concept yet many traditional colleges and universities almost completely ignore this. Because companies such as Lincoln Educational Services Corporation realize this, they are able to attract students and steal market share from traditional schools.

Lincoln Educational Services Corporation has a reputation of being able to help graduates get employment. Here is how it has accomplished this. The schools work with local employers and ask them what kind of training students need to receive to be useful to these employers. Each school also has an advisory council comprised of local employers who are there to provide feedback on whether the company is doing a good job preparing students for what the market needs. The company also hires placement staff that maintain a database of potential employers all over the country. This helps the company place students in career fields of their choice.

When I am reading about such efforts, it doesn’t surprise me that traditional colleges and universities are losing market share. Maybe one day they will wake up and realize that their role is to prepare students for employment and actually help them get a job.

Performance

2009 2008 2007 2006 2005
Revenues 552,536 376,907 327,774 310,630 287,368
Cost and expenses:
Educational services and facilities 211,295 153,530 139,500 129,311 114,161
Selling, general and administrative 252,673 187,722 162,396 151,136 138,125
Loss (gain) on sale of assets 35 80 -15 -435 -7
Impairment of goodwill 215 0 0 0 0
Total costs and expenses 464,218 341,332 301,881 280,012 252,279
Operating income 88,318 35,575 25,893 30,618 35,089
Other:
Interest income 29 113 180 981 775
Interest expense -4,275 -2,152 -2,341 -2,291 -2,892
Other income 35 0 27 -132 243
Income from continuing operations before income taxes 84,107 33,536 23,759 29,176 33,215
Provision for income taxes 34,868 13,341 9,932 12,092 12,931
Income from continuing operations 49,239 20,195 13,827 17,084 20,284
Loss from discontinued operations, net of income taxes 0 0 -5,487 -1,532 -1,575
Net income 49,239 20,195 8,340 15,552 18,709
Net profit margin 8.91% 5.36% 2.54% 5.01% 6.51%

Over the last several years, the company grew revenues from $287 million in 2005 to $552 million in 2009, which is a 92 percent increase over this time period. It was able to achieve this growth through strategic acquisitions and organic growth. However, acquisitions were the major contributing factor.

Net income didn’t follow the same pattern. It decreased from $19 million in 2005 to $16 million in 2006 and $8 million in 2007. Then, it increased to $20 million in 2008 and $49 million in 2009. This happened because expenses increased much faster from 2005 to 2007 than revenues did, thus squeezing margins. They increased much faster because the company completed acquisitions in 2005 and 2006, thus increasing expenses. At the same time, enrollment without acquisitions decreased in 2006 and 2007. It is no surprise that internal enrollment decreased because the unemployment rate was low during these years and people didn’t feel they needed education to get jobs. Then the enrollment situation completely turned around in 2008 and 2009 as the economy slowed down and people went back to school to improve their chances of getting employment

Risks

The biggest risk that the company is facing is regulatory risk. The entire for-profit education industry is being criticized for offering education that does not prepare students for better jobs and leaves them with high levels of debt. To deal with this problem, the Department of Education proposed the “gainful employment” rule. One of the stipulations of this rule is that if fewer than 35 percent of students are repaying the principal on their federal student loans, the school will lose its eligibility to participate in Title IV programs. This is extremely risky because all for-profit education companies rely heavily on these programs to generate revenues. For example, Lincoln Educational Services Corporation derives over 80 percent of its revenues from Title IV loans, and based on the recently released data from the Department of Education, it appears that some of the company’s schools would fail this test if the rule is passed as is.

Conclusion

Even though the company has had some tough years since 2005, it appears that it is back on track. The future demand is likely to stay high as the company provides education services that are very much needed. However, because of the regulatory concerns that could have a devastating impact on the company’s operations, investing in this company is a risky proposition.

Disclosure: The Author does not own LINC.

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